SACRAMENTO -- Two Arizona nonprofit groups that failed to disclose the source of more than $15 million in political donations last year will pay a record $1 million fine under a settlement announced Thursday by the state's political watchdog agency and the Attorney General's Office.

And in an unprecedented move, the two California organizations that received the "dark money" will have to send all of it to the state treasury through an obscure practice called "disgorgement," even though most of it has already been spent. One of the conservative groups quickly issued a statement indicating it was stunned by the move and would refuse to pay the stiff penalty.

Ann Ravel
(Rich Pedroncelli, AP)

The nonprofits being assessed the fine are known as Americans for Responsible Leadership and the Center to Protect Patient Rights. Both are based in Arizona and connected to billionaire brothers Charles and David Koch, the controversial oil magnates who fund numerous conservative causes.

Last year, this newspaper was the first to reveal the Kochs' connection to the dark money.

State campaign finance investigators also found that scores of deep-pocketed California donors influenced two of last year's most controversial ballot initiatives by first writing checks to a Virginia non-profit. That group eventually funneled the money back home without their names attached.

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A poorly redacted list of those individuals includes Los Angeles philanthropist Eli Broad, investor Charles Schwab and members of the Fisher family, which founded the Gap. None of them could be reached Thursday for comment.

Ann Ravel, the outgoing chairwoman of the Fair Political Practices Commission, said her agency has been aggressively litigating and working on new laws and regulations to prevent other groups from giving similar anonymous political donations in California.

She said she hopes the fine, the largest in the FPPC's history and reportedly the third largest political fine ever levied in the U.S., will send a powerful message. But she conceded that the settlement does not require complete disclosure of the groups' donors -- something she and other advocates of campaign "sunshine laws" have called for.

"Dark money is a nationwide issue," Ravel said. "These groups exploit loopholes in the law to undermine the clear purpose of the law -- to give essential information to the public."

The names of donors on the redacted list were not meant to be made public because California law does require it.

Malcolm Segal, an attorney for the Center to Protect Patient Rights, emphasized in a statement that the commission found that the nonprofit had acted in good faith and never intended to conceal any information from the public.

Still, Gov. Jerry Brown and pro-labor groups issued statements praising the settlement as a stern rebuke to the lack of campaign funding disclosure.

"Secrecy and money don't mix well in a democracy," Brown said. "For 40 years, I have been fighting for disclosure and honest reporting of campaign spending. Today's shocking revelation by the FPPC makes it plain we still have big loopholes to close."

According to the settlement, the Arizona nonprofit groups gathered checks last year from a complex web of donors in states as far away as Virginia, then made payments of more than $15 million to two California groups that spent the money on advertising to influence last year's ballot wars.

It was California Republican fundraiser Tony Russo's idea to solicit donations for nonprofit groups with 501(c)4 status as a way to conceal donors' identities, according to documents released by the FPPC. For federal tax purposes, non-profit groups with that distinction are not required to name their contributors.

In an interview with state investigators, Russo said he consulted representatives of the Koch brothers about his plan and won their support.

About 150 donors from California, Arizona, Nevada, Colorado, Washington state and Washington, D.C., gave money through Russo this way and wrote checks to Americans for Job Security, an obscure Virginia nonprofit group. Their gifts totaled $29 million.

The Virginia nonprofit then wrote checks to the Center to Protect Patient Rights for nearly $25 million. This part was legal, California campaign finance officials said.

The Center to Protect Patient Rights ran afoul of California law when it made donations to two other out-of-state nonprofit groups — the American Future Fund and Americans for Responsible Leadership -- that subsequently gave money to two California nonprofit groups without disclosing itself as the source of the cash.

Some of the money was used to oppose Proposition 30, Gov. Jerry Brown's tax-hike initiative, and other funds were used to support Proposition 32, aimed at restricting unions' use of dues for political purposes.

But the money didn't do much good. In last November's election, Proposition 30 passed handedly, and Proposition 32 was easily defeated.

Bob Stern, the former president of the Center for Governmental Studies and the author of the state's Political Reform Act, said the secrecy of the donations backfired. Instead of helping to defeat Brown's tax initiative, outrage over the donations gave the governor another issue to campaign on.

Stern added that the fine will force future potential donors to take notice and abide by California's strict laws governing campaigns.

"This case sends a very important message that California takes its disclosure laws seriously before and after its elections," Stern said.

Under a little-known clause of the state's Political Reform Act, the two California groups who received gifts from the Arizona nonprofits will have to make equal payments to the state's general fund for their role in failing to disclose the true source of the money.

The Small Business Action Committee will be forced to pay $11 million, and the California Future Fund for Free Markets will have to pay $4.08 million. However, it wasn't immediately clear how the two groups will make these huge payments since the money is long gone.

The Small Business Action Committee said it was "blindsided" by the FPPC's demand that it give back the $11 million donation it received last year.

"We vehemently disagree on the issue of disgorgement," the group's president, Joel Fox, said in a statement. "We believe disgorgement only applies to candidate elections."

Steve Churchwell, the group's lawyer, said the group had no knowledge before Thursday that the state's political watchdog planned to ask it to make any kind of payment. He said the group has no intention of paying.

"We don't have this money anymore, and the state knows we've already spent it," Churchwell said. "I don't expect there will be any move to pay. How could we?"

Thursday's announcement was a last hurrah in Sacramento for Ravel, a Los Gatos resident and former Santa Clara County counsel who will be sworn in Friday afternoon as a federal election commissioner in Washington, D.C.